Export credit insurance covers the exporter when international customers default or otherwise cannot pay. In unstable situations, bankruptcy or in cases of inflation, export insurance will pay a large portion of what the customer would have paid. Therefore, this type of insurance provides the security that all debts will be paid by consumers in one way or another.
Security
The main advantage in export credit insurance is security. One can go into serious international business without worrying about default, bankruptcy or political instability. An entire range of worries over political violence, inflation of the customer's currency or personal default are eliminated with this sort of insurance. One can have more confidence in international expansion when customer payment is not a major problem.
No Cash Advance
If an exporter feels insecure with an international customer, it is common for the exporter to ask for cash in advance of shipment in case of default. Demanding cash in advance is never pleasant for the buyer. It harms one's competitiveness when one firm asks for cash in advance for products while other firms do not. Asking for cash in advance can be taken as an insult for customers who see it as a lack of confidence in either the buyer's honesty or business sense. Export credit insurance eliminates this common but problematic practice since it will reimburse the exporter even if the customer does not or cannot pay.
Eliminates Red Tape
Many firms spend a fortune trying to recoup losses from bad deals. International litigation over these questions is costly, time consuming and frustrating. With export credit insurance, spending months and thousands of dollars tracking down buyers who have defaulted or who refuse to pay is eliminated. In short, this kind of insurance makes it possible to eliminate money and man hours that would otherwise go to collection concerns.
Increased Competitiveness
Export credit insurance will reassure investors that the firm cares about their money. Banks like the idea of insurance because it lessens the firm's own risk of default. If buyer payments are no longer a concern, then resources can be put to further expansion. One can go into more unstable areas and expand in places one would not go if payment was a problem. A firm can take potentially lucrative risks where otherwise they would not invest. Insurance gives the confidence to expand with greater speed and vigor. Even more, the firm that secures your overseas sales will have an interest in making sure the money is paid to the exporter. As a result, the insurance firm or bank will be able to advise the exporter on collection issues.
Extending Credit
Extending lines of credit to numerous foreign buyers becomes much easier with export insurance. If one does not need to worry about repayment as a matter of course, one can then provide more and higher lines of credit to foreign customers. In other words, more customers can be reached with this confidence than if these transactions were unsecured.
